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Comment from a contact – Ralph Black, CFB

June 2016 - Issue 82

Financing Development & Construction Projects

The April 2016 edition of our Construct Newsletter reported on the results of the survey taken at Prettys’ last round of Developers’ Clubs in March: 25% of respondents had confirmed that availability of funding was a major factor to be tackled to create more opportunities for property development. The findings have generated much discussion, particularly with our funder contacts who are keen to ensure our readership is aware of the broad range of funding options available in the current market.

Ralph Black, Director at Commercial Finance Brokers UK Limited, was one of them and comments further as follows based on his experience:

Despite what many developers & builders might assume, there is a wall of money waiting to be lent and invested in property development by a range of lenders that has never been wider. And therein lies the single biggest distinction between now and the period running up to the financial crash. Whilst, back then, the main high street banks would lend to almost anyone to do almost anything at rates as low as 2% over base (but certainly no more than 6%), nowadays some high street lenders are cherry-picking the very best deals from the most experienced and well capitalised developers – and will only lend 50% - 60% of the costs of a project.

But funding of up to 100% of the costs of a project is relatively easily available – although in these circumstances the funder will tend to do so on a profit-share basis. If you do have some capital available, and your borrowing requirement is less than 90% of the project costs (site, construction, fees) and the loan facility will be more than £500k, funding is freely available from a myriad of lenders at rates starting at about 6%. Fees will vary significantly – especially the exit fee.

If the project is a little racy, or the total borrowing requirement is less than £500k, or your experience as a developer is not as great as it could be, funding is still available but the rate is likely to be a lot higher. At the top end rates will peak at about 1% - 1.5% on drawn funds.

The other significant number when determining who will lend is the GDV – gross development value. In our experience, the high street banks will not lend much beyond 60% of the GDV whereas the expensive lenders might be persuaded to lend up to 75% of GDV for the right project in the right location.

In CFB’s experience, lenders are also reticent about funding any sort of commercial development unless there is a pre-let or it’s for the client’s own use on completion. The other main difficulty for funding these days is land: there are very few lenders who will support proposals where full planning is not in place. Clearly PDR is an exception, although the majority of lenders will want confirmation from the planning authority that PDR conversion is accepted.

The fees involved are also generally higher than before the crash. Lender’s arrangement fees are now likely to be in the 1.5% - 3% of the total facility. And exit fees are now very common – apart from with the high street banks. Some lenders will base their exit fee on the GDV – which can be eye-watering, whereas other lenders will charge their exit fee on the loan facility. So you need to ask the right questions and check quotations carefully!

So, in conclusion: the key metrics are borrower experience, loan to cost and loan to GDV. To get the cheapest funding you need to score well on all those issues. As your score slips on each one your choices change – which generally means your cost of funds will rise. But keep this in mind: if your project is profitable, you will still be making a significant profit for your own enjoyment using someone else’s money!

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, views or policy of Prettys LLP.